The Investment Management Association’s (IMA) announcement of a record net outflow of more than £600m from equity funds in November was widely seen by analysts as a sign of the continuing impact of the subprime crisis on the fund market. The statistics mark the first net outflow of funds from the retail investment sector for 25 years, with property being hit particularly hard with an outflow of £253m.
The IMA highlighted the danger of subprime in October. It warned the Treasury and the Financial Services Authority (FSA) that their proposals for a recognised covered bond scheme could allow subprime assets to find their way into funds for investors in Britain.
Richard Saunders, chief executive of the IMA, says: “November saw record retail outflows, with investors redeeming holdings in property, equities and bonds. The negative trend was also evident in sales of non-UK funds and Isas.”
The tightened credit restrictions and reduced liquidity in the market that came as the credit crunch began to be felt by markets in August have made investors nervous. The London interbank offered rate (Libor) dropped last week to its lowest since the crisis began, but it remains significantly above historical averages. This has had an impact on the property sector, according to Miles Shipside, commercial director of Rightmove, an online estate agent.
“The Bank of England base rate is the most important factor in setting mortgage rates,” Shipside says. “However, problems in the mortgage funding markets mean that the biggest influence has been the interest rate at which banks are prepared to lend to each other rather than that set by the Bank of England.”
House prices in England fell by 3.2% in December, with a fall of 6.8% in London, according to statistics compiled by Rightmove. The depreciation of house prices has prompted fears of a British property crash, causing investors to lose confidence and pull out of the sector in record numbers even though property funds invest in commercial rather than residential property.
Mark Dampier, head of fund research at Hargreaves Lansdown, is not surprised by the IMA’s findings.
“If you have continual bad news, then what do you expect from investors?” he asks.
The FTSE 100 share index dropped almost 14% in August to a year low of 5821.7 and, after the turbulent last months of 2007, growth in 2008 is predicted to be below previous expectations. Morgan Stanley, an investment bank, has warned that the FTSE may fall by as much as 16% over the year.
The heavy outflow from property, Dampier says, was predictable as the price boom in the housing market slowed in 2007. “The property sector was highly fashionable last year but people seem to have bought into it at the wrong time.”
Many share Dampier’s pessimism about the prospects for parts of the sector. Robin Stoakley, managing director at Schroders, says he would be “very surprised” if the large scale of redemptions in property funds did not continue over the next six to 12 months.
“Most IFAs I’m talking to are, where they can, reducing their property allocation,” Stoakley says. He sees the growth sector in 2008 as being property securities funds.
“Global property securities are likely to be a big beneficiary of the troubles in the commercial property unit trust sector because we still believe investors want to invest in property but want to diversify away from property unit trusts,” he says.
There are, however, signs that the financial markets will not be all doom and gloom this year. As investors shift focus to a more cautious approach some analysts suggest this may not be a negative move for the prospects of the market across the year as a whole. Dampier remains bullish, arguing that “people are sitting on their money and so there’s no reason why it can’t eventually come back into the market”.
“Taking a contrarian position, the cautious approach may prove to be a positive one. More money is being put into building societies at the moment and if interest rates fall by 1% as expected it could encourage investors back,” says Dampier.